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Fed’s Mortgage-Backed Shift Threatens Bond Market Calm

Convexity hedging seen triggering volatility in Treasuries.

By Liz Capo McCormick, Matt Scully and Edward Bolingbroke, Bloomberg | Updated on March 20, 2017

As far as bond buyers go, the Federal Reserve is pretty laid-back.

Even as the central bank amassed trillions of dollars of debt to prop up the economy following the financial crisis, it didn’t hedge its holdings or worry about gains and losses that might keep ordinary investors up at night. This extreme buy-and-hold stance has had an incredible calming effect on the bond market. Volatility has plummeted to lows rarely seen in recent memory.

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